The Patent Wars: More Bark, Less Bite

Microsoft's patent grab likely doesn't constitute an offensive

Remember when tech companies were happy just to be creating something new? The whole idea was to create a site, a service or a product that would change the world.

But more and more, the competition inside the tech isn’t to come up with a better idea than someone else — it’s to collect more patents than everyone else. Less about making customers want to pay you for your great new thing, more about suing other big companies to pay you for the right to build their new ideas on the back of your old ideas.

Or even better: To buy someone’s old ideas — even those going back 15 years.

So appealing has that strategy become that Microsoft (NASDAQ:MSFT) is paying $1 billion for 800 patents from AOL (NYSE:AOL), or about $1.25 million per patent. That follows Google‘s (NASDAQ:GOOG) $12.5 billion purchase of Motorola Mobility, seen as a move to buy Motorola’s patents. And that followed Google’s failed bid to buy a patent portfolio from Nortel.

With so much money being spent on so many patents, how are investors to consider the patent wars? Especially when keeping up with patent disputes can be so dull. Apple (NASDAQ:AAPL) is suing Samsung, shortly after Samsung sued Apple in Korea. Apple also is suing HTC for infringing 20 patents (yes, HTC also is suing Apple). Oracle (NASDAQ:ORCL) and Google’s long-running patent dispute is going to trial. And these are just the headlines from the past month.

For the most part, the patent wars are a good deal of sound and fury that will have little impact on tech investors. The patent news concerning Microsoft offers a good example. If Microsoft records the patent acquisition as an asset purchase, it will add to its balance sheet. Then the question is: Why does Microsoft want these patents?

Some of the patents that AOL sold to Microsoft reportedly are ones that it acquired in its 1998 purchase of Netscape. Some are from recent years, but given AOL’s lack of innovation lately, these newer patents might not be valuable. Neither company said much about what patents were bought, but some speculated they involve everything from browser-based apps to cookies.

If Microsoft goes on the patent offensive, the news could have short-term repercussions for investors. When Yahoo (NASDAQ:YHOO) sued Facebook, it hurt the company’s brand, tainting its image by making it look like a washed-up patent troll. But the news also sparked a 8% rally in Yahoo shares over the next week to $15.61 — though the stock has since drifted back down below $15.

The impact of Yahoo’s news was short-lived because patent cases can draw on for years, often drawing countersuits and leading to settlements where undisclosed payments are agreed on. Legal fees might add up, but the impact is only occasionally material to quarterly earnings.

It’s more likely Microsoft is interested in building up its patent portfolio as a defensive fortress, expecially now that its alliance with Nokia makes it a more direct competitor with Google/Motorola. If Google goes after Microsoft for selling smartphones powered by Windows Phone software — which might or might not rely on Google’s patents – Microsoft conceivably can counterattack with claims that Google ‘s web technologies are relying on its Netscape patents.

In other words, it might just be simple game theory — tech giants gathering enough patents to ensure that no one sues another unless it’s a serious patent violation.

That’s the optimistic scenario. There are, however, reasons to think Microsoft might become more serious about enforcing the patents it owns. Last summer, it asked Samsung to pay $15 in royalties for every Android phone it sold. And it’s deeply entangled in a complex patent fight with Motorola.

In the end, the patent wars are just business: Companies taking umbrage at rivals stepping onto their turf. Aside from the occasional big payout, these patent maneuverings are more about saving face in the industry than about things that alter the bottom line.

As of this writing, Kevin Kelleher did not hold a position in any of the aforementioned securities.